- The transportation sector plays a pivotal role to maintain supply chain and boost economy by providing job opportunities to millions
- Fluctuations in oil prices, capital investment, economic performance and regulations impact the transportation sector performance profoundly, affecting stock prices as well
- The current pandemic has affected the transportation industry with a major impact on aviation sector, prompting operators to secure more funding to maintain cash balance
- With the COVID-restrictions easing from April, industry operators are set to commence limited operations
The transport sector is the lifeline of an economy. The entire supply chain, personal and commercial freight and personal movement depend on road transport, rail, aviation, and marine. Transport, together with postal and wearhousing contributed close to 5% of the total gross value added to the economy (ending June 2017-18), as per data released by austrade.
The sector also showcase range of operators – airline companies, air freight companies, logistic companies, trucking, tour and travel service providers, toll operators, shipping companies. The earnings of these operators get influenced by many factors such as oil prices, debt, regulations, etc. Let’s dig dipper to understand these factors.
Oil prices impact Transportation companies heavily. Fluctuations in the oil price affect the earnings of the companies and prompt them to be more fuel efficient. All operators, whether airlines or road transport service providers such as trucking companies or logistics companies, are depended on fuel to run their business. Higher the price less will be the profit margin. Oil price fluctuations affect the operating profitability of these companies profoundly. It is no surprise that during the periods of high oil prices we see that the players within transport sector struggle to hold on to their margins , unless they have the pricing power to pass on the prices to their customers. While a higher oil price will take its share price to south, low oil prices have a positive effect on the share price and provide investors a good chance to earn returns. This is one reason why this sector is cyclical in nature.
The transportation companies have to invest heavily to acquire heavy duty or light commercial vehicles. Airlines spend millions for acquisition of airlines. These financial costs lead to a considerable amount of long-term debt on a company’s balance-sheet.
Regulations and trainings
The transportation industry is subjected to regulations as it carries business risk and individual risk. Regulation on license, training and certifications requirements affects driver supplies. Shortage of drivers increases cost of acquisition of driver and also affects operations, impacting business performance. The shipping industry at the starting of this year saw IMO regulations mandating lower sulphor content in shipping fuel, directly impacting on the operating costs.
A booming economy creates demand for services and commodities across all sectors. This creates need for transportation services in an economy. This in turn creates more jobs and boosts the service operators business. Road Transport is at the top of the employment charts while Water Transport being the smallest.
Employment level and projection
Source: National Industry Insights
COVID-19 Hits Transport Sector Hard
The effect of the pandemic has been felt across the sectors. With international borders closed and domestic flights on hold, the aviation industry is severely impacted with no passenger traffic or air-frieght. Costs such as maintaining workforce also adds to the burden. Many are strengthening their balance sheet by acquiring additional debt. Sydney Airport Limited (ASX:SYD) received an additional bank debt facilities of $850 million while Qantas Airways Limited (ASX:QAN) secured a debt funding of $550 million to meet up the loss as the airline extended flight cancellations through to the end of July.
For road transport industry, the COVID-19 pandemic has presented a unique challenge. Meeting supply chain demand has become essential to address the crisis impacting Australians and Australian businesses. According to National Road Transport Association (NatRoad) CEO Warren Clark highlights, road transport industry operators are experiencing negative impacts of COVID19 on their business. Running on reduced capacity, increases operational costs and proves detrimental for the business operator and thus affects the supply chain. NatRoad, largest national representative road freight transport association, has requested for backing from the government to take measures to reduce running costs for road transport industry players.
Road to Recovery
With COVID-19 restrictions being lifted progressively from April, the aviation sector is witnessing a rise in number of domestic flights operating. Currently air-travel is limited within few cities though. Qantas is flying between major capital cities and to thirty-six regional destinations until the end of June 2020.
Road transportations will also witness an uptick with toll operators commencing their business. Transurban Group (ASX:TCL) has also commenced toll activities at various federal highways.
Disclaimer: All the currencies mentioned are in unless specified